Debt Management

DM 18

Written evidence submitted by the Money Advice Trust

The Money Advice Trust

1. The Money Advice Trust (MAT) is a national charity founded to help people across the UK tackle their debts and manage their money wisely. MAT’s frontline services include the provision of debt advice (to 150,000 individuals and 30,000 small businesses via National Debtline and Business Debtline respectively). We also train free-to-client debt advisers across the country and develop products (such as the Common Financial Statement) to improve the credit and debt environment. We are on track to support 1,356,000 people in 2011 [1] .

1.1 MAT sits at the heart of money advice in the UK. Our Partnership Board and grants programmes enable us to gather intelligence from other national advice providers, government departments, major creditors and local charities. MAT also conducts an annual research programme which seeks to develop understanding around causes of and behaviours in relation to problem debt. Publications in the past year have looked at the key macro-economic drivers of demand for debt advice, gendered behaviours around dealing with problem debt, the case for early identification of debt problems and supportive intervention by creditors and the ongoing impact of the recession on low and middle income families in relation to their use of credit [2] .

Consumer Debt

2. MAT notes that the Select Committee has requested evidence around the general area of consumer debt. MAT’s recent research (see Appendix A) has identified the following trends. Firstly, that the key drivers in demand for debt advice (and thus of debt in the initial instance) are: rising cost of credit, stagnating wage growth and rising unemployment. Recent qualitative research has confirmed that many families are only managing due to low interest rates. Secondly, that demand for debt advice is greatly outstripped by unrecognised need: at any time, approximately 5 million people display indicators of problem debt, of whom only 1 in 6 seek advice from any source [3] .

2.1 Thirdly, both qualitative and quantitative research indicated that consumer debt becomes problem debt usually through life events unforeseen by the consumer when credit arrangements were taken out (such as job loss or relationship breakdown). This is particularly true when two such life events occur within a short period of time. [4]

2.2 This research is worth considering in this context because it highlights the extent to which problem debt is often beyond the consumer’s foresight or control, particularly in the current economic climate. Clear solutions, which cover the different types of consumers (from low to high levels of debt, assets and income) and provide clear protections (such as freezing of interest and charges) support people back into financial health.

2.3 Research published by the Money Advice Trust in early 2011 on gender differences and advice seeking did not explore differences between men and women getting into debt, but did suggest that men are less likely to seek advice [5] .

2.4 MAT has insight into the overlap between business and consumer debt through its provision of advice to small businesses via Business Debtline (BDL). Since 2009, the number of business owners calling the helpline citing use of personal credit has doubled. The reasons behind this have not yet been thoroughly investigated, but anecdotal evidence from callers and from our advisers suggests that restriction in the availability of business credit is a factor. Some of this restriction may be perceived rather than actual: for example, business owners may be choosing to use personal credit over business credit due to media coverage on small business lending and fears around footprints of rejected applications on credit files. MAT is exploring research proposals around this for 2012.

Support mechanisms for people in debt

3. In MAT’s opinion, the BIS response to the consultation did not go far enough in providing options for individuals in debt. The existing series of options is complicated [6] but at the same time some people fall through the gaps between appropriate remedies.

3.1 MAT would advocate the Select Committee looking at the ways in which the Debt Arrangement Scheme works in Scotland and also considering the possibility of statutory debt management plans, as outlined in the initial consultation paper. Elements of these would provide more protection for people who fall though the gaps in the current system – in particular, a moratorium on interest payments, no lower limit on surplus income available and payment to creditors via an approved payment distributor.

3.2 MAT welcomes the acknowledgement in the consultation response that "Some commercial [debt management] providers steered individuals towards solutions that were aimed more at generating income for the provider than providing the best solution for the debtor" and the announcement that a debt management protocol will be established to work alongside the OFT Debt Management Guidance. However, we have a concern if this protocol were to be voluntary – as the IVA Protocol currently is – since there is no compulsion on companies only to offer compliant products. We therefore do not believe that on its own this could drive out rogue elements in the debt management industry; it is worth remembering that when the OFT investigated this sector in Autumn 2010 they found over 90% non compliance with their guidelines across the industry. We support the OFT’s attempts to raise standards within this sector but continue to have concerns about widespread poor practice.

3.3 MAT welcomes the announcement in the BIS consultation response that all lenders should direct customers experiencing problems to a source of reputable debt advice and points to its research regarding effective early intervention by creditors [7] . However, this research also highlighted some considerations around effective customer referral: the organisation or channel (face-to-face, telephone or internet) needs to be appropriate to the customer’s needs and the reasons for referral must be made clear to the customer, so that they do not feel "abandoned" by their lender at a point of vulnerability. We believe that the additional measures which would help would be: a national kitemark for reputable advice sources, tailored referrals to specific sources of advice depending on the customer’s needs and clear explanations in plain English on the reasons for and benefits of referral. Early findings from research into the different channels for debt advice, commissioned from MAT and being undertaken by Policis indicate that clients of telephone, face-to-face and internet advice tend to be equally satisfied where the service is appropriate to their need.

3.4 MAT understands that the £27m Financial Inclusion Fund previously run by BIS for provision of face-to-face advice in England and Wales will now be administered by the new Money Advice Service (and possibly extended to Scotland and Northern Ireland) and funded by a levy raised on the financial services industry. It is important to note that this £27m does not cover anything like the entirety of debt advice services provided via a range of channels in the four administrations of the UK and funded largely by central and local government. Independent research conducted last year by the Friends Provident Foundation estimated this to be in the region of £106-£109m pa. Additionally, financial services and other consumer lenders currently provide funding directly to charities in the sector, either through donations (as in the case of the Money Advice Trust [8] ) or via a ‘Fair Shares Contribution’ [9] as in the case of the Consumer Credit Counselling Service. The Committee should be aware that beyond funding the face to face services, the Money Advice Service plans to co-ordinate debt advice across the UK from approximately the end of 2013. In the transition between April 2012 and this point debt services will continue to need funding, at a time of significant need and when our forecasting predicts rising demand for debt services. Without adequate transition arrangements, many individuals will be unable to access advice and may turn to fee-charging debt management companies or simply ignore the problem until it becomes much more severe and can only be resolved by more drastic and expensive solutions such as bankruptcy.

3.5 In addition, it is worth noting that a broader range of creditors than those who will be paying the Financial Services Authority’s /Money Advice Service’s levy benefit from debt advice. We have suggested both to the Money Advice Service and to the FSA – soon to be the Financial Conduct Authority – that they should consider extending their levy to cover this wider set of creditors.

3.6 The Committee will be aware that changes to legal aid provision mean this will not be available to those in debt, except where repossession is imminent. We expect this to start to have an impact on the variety of sources to which we can refer clients in need of specialist legal support.

3.7 MAT supports financial education as a means, over time, of preventing some debt problems and empowering consumers. In our experience, provision of debt advice provides an ideal "touchpoint" to improve financial knowledge and capability more broadly because the individual is actively engaged with the topic. National Debtline already provides some elements of this, for example by supporting people to create and maintain personal budgets. This has a strong positive impact: more than 86% surveyed as part of our 2010 longitudinal service evaluation indicated increased knowledge and confidence about managing money.

Recommendations

4. The Money Advice Trust’s recommendations for the Select Committee are as follows:

· Consider how best to share best practice amongst creditors around early intervention for customers showing signs of financial stress, and effective signposting and referral to reputable sources of debt advice.

· Consider introduction of a national kitemark for reputable debt advice.

· Appreciate that different channels for debt advice (face-to-face, telephone and internet) serve the needs of different types of clients. Better understanding of the evidence here could ensure that customers access in good time a channel they can use effectively, thereby preserving more expensive face-to-face services for those who really need them.

· Discuss as priority with those responsible how debt advice services beyond those previously falling under the Financial Inclusion Fund will be supported and funded between April 2012 and end 2013.

· Consider introduction of aspects of Debt Arrangement Scheme or aspects of statutory debt management plans to a) provide clear protections for all consumers and b) ensure no consumers fall between gaps of appropriate debt solutions.

· Consider requirements for fee charging debt management companies to make clear in advertising and at first contact that independent, free-to-client alternatives from non-profit providers are also available, as outlined in the Private Member’s Bill presented by Yvonne Fovargue MP (which received cross-party support) on 19th October 2011.

· Consider how to most effectively raise standards within the fee-charging debt management sector.

Appendix A: Summary of research reports commissioned by the Money Advice Trust and used to inform this briefing.

· Demand, capacity and need for debt advice in the UK http://www.infohub.moneyadvicetrust.org/content_files/files/demand_and_capacity.pdf (Dr John Gathergood, University of Nottingham): identifies macro-economic drivers of debt advice and scale of unmet need.

· Seeking Direction: men, money and the road to financial health http://www.infohub.moneyadvicetrust.org/resource.asp?r_id=647 (Dr Jackie Goode, University of Leicester Centre for Research and Social Policy) gendered attitudes to debt, money management and seeking advice.

· Facing the Squeeze: a qualitative study of household finance and access to credit http://www.infohub.moneyadvicetrust.org/content_files/files/facing_the_squeeze_2011_final.pdf: (Sharon Collard, University of Bristol) identifies the role of "life events" and co-occurrence in creating unmanageable debt.

· Understanding financial difficulty: exploring the opportunities for early intervention http://www.infohub.moneyadvicetrust.org/content_files/files/facing_the_squeeze_2011_final.pdf (Sharon Collard, Bristol) outlines successful practice for early identification of and intervention with customers facing unmanageable debt and considerations regarding signposting or referral to third party sources for advice.

· Research into channels for debt advice (Policis, publication pending): identifies efficacy and customer satisfaction with different channels (face-to-face, telephone, internet) for debt advice.

Appendix B: Strategies for Dealing with Debt (charts we provide to our advisers to assist clients in identifying correct remedies).